Student-investors manage university's $1 million
by Sookhan Ho
Audra: "I looked at Comsat. It's in utilities--long distance service."
Mike: "Got a beta on that?"
Audra: "Point nine. Earnings per share are expected to double this year. P/E ratio is 13.5."
When Audra Derr and Mike Ackerman get together with other Virginia Tech students every Tuesday night, their conversation bristles with notes on price-earnings ratios, two-for-one splits, and other matters that would warm any stock analyst's heart.
These kids have weighty business at hand: the state of their $1-million stock portfolio.
No, this is no paper portfolio involving make-believe money. It's the real thing.
Derr and Ackerman are among 17 students at Virginia Tech's Pamplin College of Business who have been allowed to invest $1 million of the university's $160 million endowment in the stock market. It is one of the largest student-run investment funds in the country.
The student-investors belong to a new student organization called SEED, or Student-managed Endowment for Educational Development. SEED was formed specifically to give students an opportunity for practical experience in investing. Though students have had an opportunity for hands-on work in stock analysis and portfolio management through simulation exercises in their courses, "it makes a big difference in the learning process when it's real money," Derr says. "You try a little harder and put more into it . . . you realize that someone is trusting you with it."
While the thought of entrusting students with even a fraction of the university's endowment may raise a few eyebrows, Virginia Tech officials have hardly batted an eye. Tech's Vice-President for Business Affairs Ray Smoot and College of Business Dean Richard Sorensen "have been totally supportive," says finance professor Don Chance, who is also the students' advisor.
"The university's purpose is education," says Smoot. "Certainly the best way to learn is by doing." Moreover, Smoot adds, the university viewed the student-investor program as another opportunity to increase the performance of the school's endowment. "Whether that happens remains to be seen, but I really believe our students will do well with it."
"That level of administrative support is unusual," says Edward Lawrence, a University of Missouri-St. Louis finance professor who has surveyed student-investor programs at U.S. colleges and universities. Of the 35 or so student-run investment funds that have been established, "Virginia Tech's SEED program ranks in the top five or six in terms of the size of the funds managed," Lawrence says.
Programs at most other schools have encountered initial skepticism and resistance among administrators and nonbusiness faculty members, he says, mostly because of fears that inexperienced students will lose large sums of money at a time when many schools are being forced to tighten their belts.
Not that Virginia Tech administrators haven't been circumspect. The university, Smoot stresses, has been "very careful" to ensure that proper procedures and policies are in place to govern the management of the funds. The students' performance, he says, is being monitored in much the same way that the university monitors the performance of its eight professional investment managers.
Whether the students will continue to manage the funds will be determined by how well they do, Smoot says. "We've reserved the right to decrease or increase the amount of money they manage." Faculty advisor Chance is not the only one looking over the students' shoulders. The university's director of investments and debt management, John Cusimano (a Pamplin finance graduate himself), is also keeping track of the trading to ensure that it conforms to foundation guidelines.
Precautions aside, Smoot points out that the students have made two presentations before the investment committee of the Virginia Tech Foundation. (The foundation receives, manages, and disburses private funds donated by the university's alumni and friends to enhance its programs.) That committee, he says, consists of tough-minded business people who have made "very critical and sound decisions" about investment management.
"They were just as demanding of our students as they would be of any investment firm making a pitch." The fact that the committee members decided to authorize the program, Smoot says, "speaks very well of the students of the Pamplin College of Business."
The students are among the college's best. To apply to join SEED, students must be either graduate students or upperclass undergraduates and have a grade point average of at least 3.0--though the qualifications of those chosen typically far exceed this minimum requirement.
Candidates must answer several questions describing how they can contribute to the program and what they expect to gain from it. They have to supply three references, a resume, and a transcript of previous coursework. Those selected volunteer their time and don't earn any credits by participating. "You have to be prepared to put in 10 hours of work a week. We want motivated, ambitious people who want to do a good job," says Fred Rolle, a finance senior who serves as SEED's executive chair.
The fact that it is an extracurricular activity is another unusual feature of Tech's student-investment program, Missouri professor Lawrence points out. Most of the other programs, he says, are run as part of a course taught by a faculty member. Moreover, he adds, while students in most schools manage funds that have been separately raised for student-investor programs, Tech's business students are actually working with a portion of the university's existing endowment.
The students work in four committees: executive, administrative, accounting, and investment. The decision to buy or sell stocks is made by investment committee members, who each specialize in three or four industries. Chance notes that, while he may suggest a particular stock or industry, the students do all the research and come up with their own recommendations. There may be an occasion for him to put his foot down on a proposed trade, Chance says, but he doubts that this will happen often. "They're all so good there's not much I have to do."
Using fundamental analysis, the students seek to invest primarily in stocks of companies with long-term growth potential. Their current holdings of some 40 companies are spread across a wide range of industries. "You reduce risk by diversifying," Ackerman says. Risks, however, will have to be taken to increase the value of the fund. "You can't afford to be too conservative," Chance says, "if you're investing for growth."
The trades are transacted through a broker and confirmed with the fund custodian, DominionTrust, which sends the money to settle each trade. (SEED is not authorized to withdraw money from or deposit to the account.) The broker's original trade confirmation is sent to SEED's own accounting committee, which monitors all trading contracts. "We're doing exactly what other money managers do," says administrative committee chair Karen Patchin.
Like professional money managers, the students are discovering that this is a particularly challenging time to be managing a stock
portfolio. President Clinton's budget package, Ackerman says, has created a great deal of economic uncertainty. "It's aimed at stimulating the economy and reducing the budget deficit at the same time," says Chance. "Those two goals are fundamentally at odds. A year from now, the picture might be a lot clearer."
To Lawrence, this kind of gritty realism only underscores the value of student-investor programs. They provide an excellent opportunity to integrate financial theory with practice, he says. "In contrast to actual experiences, knowledge not immediately applied tends to be quickly forgotten," he writes in an article published in 1990 in The Financial Review, a scholarly journal published by the Eastern Finance Association.
Paper portfolios and simulations, he says, do contribute many educational opportunities. Students can "explore the mechanics of markets, learn how to perform financial analysis on companies and their securities, understand better the tradeoffs of risk and return, and 'experience' different market conditions in a short period of time."
Still, he says, it's hard for students not to see their actions only as part of a game or exercise. He cites one simulation contest sponsored by AT&T, in which students resorted to such unlikely tactics as maintaining large positions in only a few stocks and borrowing heavily to finance their holdings. "The psychological impact of a successful strategy or the pain of a poorly designed one does not carry the weight of real-life decisions."
Patchin, who is planning a career in investment banking, says SEED "lets us put everything we learned in class all these years to work." Ackerman adds: "You really learn how to deal with a broker, use Value Line and the Dow Jones News Retrieval service."
Letting students manage real portfolios, Lawrence says, also teaches them about teamwork and enhances interpersonal skills. "With individuals making specific recommendations to buy or sell particular securities and trying to convince other members of the merit of these actions, there is much more at stake than simple numbers. Mistakes are not easily forgotten in this kind of environment."
SEED members couldn't agree more. "We're competing with one another for the same amount of money to buy stocks. When you're up against people who are bright and good at what they do, you want to make sure that you've done your research and can stand by your recommendations--and articulate your position well," says Derr.
Rolle, who supervised SEED's organization, says: "I've learned how to interact with people and organize a group. I had a tendency to be short-tempered . . . I've learned to be more patient!"
It is an honor, the students agree, to be in the first group of student-investors in SEED. "I'm very proud to have had a hand in building something like this," says Rolle, who hopes to come back for "five, 10, 25-year reunions." Says Derr: "It's been the best experience I've had at Virginia Tech."
Initial support and start-up funds for SEED were provided by the Pamplin College of Business and John J. Conklin III 9ACCT '79)
Sookhan Ho is an information officer for the Pamplin College of Business.
Virginia Tech Magazine Volume 15, Number 4 Summer 1993